The Dilemma of the Quantitative Easing

On Friday the economic statistic I was most interested in was the revolving credit in the Federal Reserve Consumer Credit report. Considering the returns we are experiencing in the stock market, bond market, housing market, and certificate of deposits, the best return for your investment is to pay down your credit card debt which is typically over 18%. Would the average American be the pragmatic investor? The answer continues to be yes.

The next question I had was how long would the average American continue this trend? So I did a few graphs of revolving credit over time to see if disposable income or inflation could explain how far it would fall. Then it struck me. I could not explain the rise in credit card debt. If we look at the graph we can see that the explosion in credit card debt is relatively new way to extract wealth from the middle class.

Total Revolving Credit Outstanding -20110407


If you believe like Dave Ramsey that to road to personal wealth starts by getting debt free, our country’s goal for revolving credit should be approximately zero. Even if you believe there is a good reason to carry some credit card debt, the pragmatic decision for the average American will be to continue to pay down their credit card debt. The only attractive alternative to paying down your credit cared is mortgage refinancing. If the mortgage refinancing gig is about over, then the credit card repayment trend should accelerate this year since there are no better investment alternatives. Then we can move onto the next financial bubble, student loans. For the short and medium term continued deleveraging is the logical choice. It is ironic that quantitative easing program whose primary focus was to encourage spending and investment, has caused businesses and households to reduce their borrowing and focus on ways to create their own sustainable financial future. In a way this lack of trust response is a condemnation of the big government model of governing and it makes it much more difficult to grow out of our financial mess. The market may be telling us that we are in the process of establishing a new normal for the way we buy things and the way we govern ourselves or it might be as simple as we are just returning to the old way we bought things. If the private sector and businesses are unwilling to take the risk by increased spending and investments, the local and state governments will not see tax revenue growth. Although higher taxes can help a little bit, most proposals generate too little tax revenue to be significant. Over the years we created a variety of budget gimmicks but eventually state and local governments have to match up revenue, spending, and unfunded liabilities.  As we phase out the budget gimmicks we will once again return to the old ways of running local and state governments. The big four blue states, California, Illinois, New York, and New Jersey, who have large budget deficits and unfunded liabilities are at the most risk to reduced growth prospects. They desperately need businesses in their state to start earning a significant portion of new profits from unit growth if the “grow out of their mess” strategy is going to work. Unfortunately this is easier said than done. Most of the recent NFIB surveys show that increased government regulations are making it harder rather easier to start up and run a business. The bad news is that if these four states cannot grow out of their mess, the country cannot grow out of its mess either. Hmm, maybe we need to listen to what the market is actually telling us and develop a plan that works for this market.